Economic growth is a concept that profoundly affects us in our daily lives. It refers to the increase in the production of goods and services within a specific period of time. Economic growth happens when businesses produce more, people earn higher incomes and the overall quality of life improves.
Economic growth is measured by the gross domestic product (GDP), which is based on the total market value of all final goods and services produced in an economy over a specific period. In other words, economic growth is an indication of whether or not an economy has improved its output or production capacity during a certain time frame. This is one way governments measure whether or not their policies are having a positive or negative effect on their citizens’ well-being.
A healthy level of economic growth ensures that businesses thrive, people have access to better jobs, and everyone can enjoy increased quality of life. On the flip side, if economic growth stalls or slows too much, it can lead to higher unemployment rates, decreased investments in infrastructure and technology, and reduced overall standards of living.
Understanding What is Economic Growth and How Does It Work
Economic growth is a measure of the increase in the value of goods and services produced in an economy over time, usually expressed as a percentage. It involves all the activities that create wealth and increase incomes, including investments in capital such as businesses, factories and construction, which result in stock prices rising. Companies use capital to invest in new resources and technology that can help them produce more products and services, which creates more jobs. This leads to increased incomes for consumers who can then buy additional products and services, which drives higher economic growth.
Positive economic growth is one of the most-watched economic indicators because it makes economic growth possible. When an economy is growing steadily at a sustainable rate, citizens benefit from job opportunities and greater access to consumer goods. Businesses also benefit from higher profitability due to increased consumer spending leading to higher profits. In turn, this allows businesses to reinvest their profits into further economic activity, creating a cycle of positive economic growth.
1. Example of Economic Growth
The U.S. economy has experienced economic growth since the late 1990s when the economy began to rebound from a period of contractions in the early 1990s. In 2016, the economy added 19 million jobs, with some sectors expanding rapidly while others lost jobs. Mining and other manufacturing industries were hit hard, but retail and professional services expanded rapidly as women entered the workforce in large numbers and productivity soared.
The weakening dollar abroad also helped as companies were able to meet increased global demand for their products and services without raising prices, resulting in higher revenue growth.
2. How To Measure Economic Growth
Measuring economic growth is key to understanding a country's progress and potential. One of the most important metrics for measuring economic growth is Gross Domestic Product (GDP). GDP measures the total value of goods and services a country produces, sold domestically. It is calculated by adding up all the income earned in one year through production activities within the nation’s borders. By comparing this figure to previous years, economists can measure the rate of economic growth or decline.
A country's economic growth is an important measure of its success and prosperity. To accurately measure a country's economic growth, countries use Gross Domestic Product (GDP). GDP measures the final production of goods and services in a given period, including exports and imports into the country. This means that product exports are included in the GDP calculation, so when a country sells products overseas, this adds to its economic growth.
Real GDP is another way of measuring economic growth. This takes into account inflation within a certain period so it can give an accurate measurement of how fast the economy is growing. The World Bank also uses Gross National Income (GNI) to measure economic growth, as this includes income from citizens working overseas. This is especially important for emerging market countries such as Mexico that rely heavily on remittances from family members working abroad as a critical source of income. Comparing different countries' economies using real GDP or GNI allows us to get an accurate picture of their level of economic growth and development.
4. What GDP Does (and Does Not) Include
A key indicator of economic growth is Gross Domestic Product (GDP). GDP measures the amount of goods and services produced within a country in a given period of time. It includes things like consumer spending, investments, government spending and exports, but it does not include unpaid work such as dependent care or volunteer work. It also does not factor in environmental costs or illegal black-market activities that may result in GDP growth.
These costs are often overlooked when calculating GDP, yet they can affect the results and should be taken into consideration when measuring economic growth.
Economic growth is a key factor in how similarly societies are ranked and compared. Nordics countries, for example, have the highest rankings due to their focus on long-term building blocks such as world-class education and social programs which create a motivated workforce. In contrast, the United States typically relies more on short-term solutions such as boosting consumer spending through military spending or cutting taxes, often at the expense of environmental costs.
High tax rates, necessary for financing high standards of living and world-class social services, may initially seem counterintuitive for economic growth but are actually among the key factors that create healthy economies. This highlights why economic policy contrasts between countries can have profound effects on their long-term economic growth prospects.
Economic growth is an important concept for nations, individuals and societies to understand. It is the process by which real wealth and economic stability are created. With a better understanding of the economic system, nations can propose and put into place policies to improve individual wellbeing and environmental levels. Economic growth can be a powerful tool to help us move towards a more sustainable future.
Frequently Asked Questions
Is economic growth always a good thing?
Yes, economic growth is generally seen as a positive indicator of economic health and can lead to improved standards of living. However, it is important to consider how this growth is achieved and the potential impact on society and the environment.
How do we determine economic growth?
Economic growth is typically measured by analyzing changes in a country's Gross Domestic Product (GDP), which reflects the total value of goods and services produced in an economy over a given period of time. To learn more, read our detailed guide on how to measure economic growth.
What is the formula for economic growth?
Economic growth is calculated by measuring the change in a country's real Gross Domestic Product (GDP) over time. Real GDP takes into account population increases, inflation, and other factors to give an accurate measure of the increase or decrease in economic output. Learn more about how economists calculate economic growth.
What drives economic growth?
Economic growth is driven by increases in productivity, consumer demand, and investment in capital goods. To learn more about the specific factors that lead to economic growth, please read our detailed guide.
Is GDP the best way to measure economic growth?
GDP is a useful tool for measuring economic growth, but it may not be the best indicator of a nation's overall economic health. Learn more about why other metrics might be better suited to measure economic growth.